# Days Payable Outstanding Calculator

Days Payable Outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills to its trade creditors, which may include suppliers, vendors, or financiers. This Days Payable Outstanding Calculator is designed to mechanize the DPO formula and help accounting departments calculate their Days Payable Outstanding (DPO) with ease and accuracy.

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## What is a DPO Calculator?

The Days Payable Outstanding Calculator is a tool that calculates the average time in an accounting period it takes a company to pay bills and invoices. It’s a crucial metric for businesses to understand their cash flow on an annual basis and manage their payable process and accounts receivable more effectively.

## The DPO Calculator Formula

The formula we use is straightforward and easy to understand. We’ll also provide an example to help you understand how it works.

The formula to calculate Days Payable Outstanding is:

``Days Payable Outstanding = (Accounts Payable / Cost of Goods Sold) * Number of Days in Period``

For example, if the Accounts Payable is \$5000, the Cost of Goods Sold is \$20000, and the Number of Days in Period is 365, the DPO would be:

``Days Payable Outstanding = (\$5000 / \$20000) * 365 = 91.25 days``

## Why is Days Payable Outstanding (DPO) so Important?

Days Payable Outstanding is a critical metric of an organization’s liquidity, liabilities, and cash management. It demonstrates X number of days in a fiscal year it takes to pay off a company’s accounts payable. Understanding DPO is important for many reasons, like:

### Working Capital

DPO is an important component of the cash conversion cycle that includes Days Sales Outstanding (DSO), AP Turnover Ratio, and Inventory Turnover. Managing this cycle effectively leads to more efficient use of working capital, allowing a business to reduce borrowing costs and make more short-term investments.

### Negotiating Power

A better understanding of your DPO helps to leverage negotiating power, leading to more favorable payment terms and early payment discounts.

### Cash Flow Management

DPO is a key component of a company’s working capital, cash inflow, and cost of sales management. By monitoring the DPO, a business can better plan cash flow, like extending a payment period to free up cash. This may be a necessary move to maintain good relationships with suppliers.

### Assessing Financial Health

Analysts, investors, and lenders often use DPO, the balance sheet, and financial statements to assess a company’s health and management efficiency. A high DPO may indicate a company knows how to handle cash flow, but may also have issues with supplier relationships or supply chains.

### Additional Reasons

• Maintaining positive supplier relationships
• Benchmarking DPO with the competition
• Risk management and supply chain disruptions
• Compliance and reporting for regulatory requirements

## Frequently Asked Questions

Simply input your company’s average Accounts Payable balance, Cost of Goods Sold, and the Number of Days in the Period into the template. The calculator will then provide you with your DPO.

A low Days Payable Outstanding (DPO) means that a company takes a short amount of time to pay vendors and suppliers for raw materials, goods, and services received on credit. A low DPO suggests the following:

• Positive vendor relationships
• Efficient cash management
• Strong financial health
• Reduced interest costs
• Lower supply chain risks

A lower DPO also leads to improved creditworthiness.

A high DPO indicates a company is taking a long time to pay back creditors. A higher DPO means a company may be struggling to pay its bills and meet credit terms. It can also be an intentional action to manage cash flow more effectively. Here are some indications a business has a high DPO:

• Delayed cash outflows to maintain liquidity for investments
• Extending the payment period for a longer cash conversion cycle
• Freeing up cash for strategic investments for debt consolidation
• Improved profit margins and expanded sales
• Strong financial discipline and liquidity management

Days Inventory Outstanding (DIO), also known as Inventory Days or Inventory Holding Period, is a financial metric that measures the average number of days it takes for a business to sell its inventory. The formula considers beginning inventory, ending inventory, and direct costs of goods sold. It is designed to assess how efficiently a business manages its inventory.

The formula for calculating Days Inventory Outstanding is as follows:

DIO = (Average Inventory / Cost of Goods Sold) * Number of Days in the Period